Exceptionally challenging times for Households in Tonga

IMF staff, during their 2026 Article IV official visit, found that Tonga’s recovery from the 2022 volcanic eruption and tsunami is being disrupted by the Middle East energy shock and an emerging severe El Niño-related drought. Growth eased to 2% in FY2026 from 4.4% in FY2025 and is projected at 0.5% in FY2027. Headline inflation rose from 2.0% in January 2026 to 12.1% in September, well above the 5% reference rate of the National Reserve Bank of Tonga, and is projected to return below that level only in FY2028.

In the concluding statement issued after discussions with the Minister of Finance, the Governor of the National Reserve Bank of Tonga and development partners, the IMF noted that the government responded promptly and reaffirmed its commitment to fiscal prudence. It recommended shifting fiscal support away from the generalized electricity and transport subsidies introduced in July toward targeted assistance for the most vulnerable based on existing social protection mechanisms, with the saved resources redirected to households affected by El Niño and to essential services.

The IMF also pointed to the need for reforms: the revised Public Financial Management (PFM) Act, pending for six years, should be enacted promptly together with procurement amendments; amendments to the National Reserve Bank of Tonga Act should establish a mandate focused on price and financial stability and safeguard the bank’s operational independence. Recapitalization of the Tonga Development Bank (TDB) should rest on a restructuring plan that resolves legacy problem loans and separates commercial and development activities.

Among other priorities, the IMF highlighted safeguarding correspondent banking relationships and lowering remittance costs, with remittances at about 39% of GDP, as the withdrawal of Australian-dollar services for two domestic banks heightens the risk of remittances shifting to costlier or informal channels. It also recommended ensuring predictable funding for the Anti-Corruption Commission and removing obstacles to private investment, including land-tenure constraints, skills shortages and limited access to finance. Based on the consultation findings, IMF staff will prepare a report for presentation to the Executive Board.